Characteristics of Consumer Credit

Characteristics of Consumer Credit

The nature of consumer credit may be the transfer of wealth to consumers for purchase of semi durables or durables except real estate where the payment is deferred in whole or in part upon agreed terms the agreed terms for repayment may be in the form of EMI.

Consumer Finance Transactions

The nature of consumer finance transactions may be

(a) Parties and Structure of the Transaction: The parties and the structure of the transaction may be either (i) Bipartite (ii) Tripartite.

A bipartite transaction involves two parties i.e.

1. Dealer-Cum-Financer and

2. Borrower or Customer.

A tripartite transaction involves three parties

1. The dealer

2. The financier

3. Borrower or customer

Transactions can either be structured in the form of hire purchase, conditional sale or credit sale, but a majority of the tripartite consumer finance transactions are of the hire purchase type.

(b) Payment for the transaction: The payment for specific transactions is divided into two categories: (i) Down Payment Schemes (ii) Deposit Linked Schemes.

The down payment varies from initial payments ranging from 20%-25% of the value of goods and financing is available for 75%-80% or as the case may be.

In a deposit-linked scheme, the down payment in the form initial deposit varying from 15% and 25% of the total value of the asset. The financier pays the full amount to the seller. Deposits carry a prescribed interest rate. Zero Deposit schemes are also available, under which the Equated Monthly Installment (EMI) is higher than the EMI under normal deposit schemes.

(c)  Repayment Period The repayment period ranges from 12-60 months. Finance companies notify the customer indicating the amount of equated monthly installments to be paid through postdated Cheques.

(d) Security: The asset is secured through first charge on it for the credit provided. The borrower is prohibited from disposing, pledging or hypothecating the asset during above said credit period.

(e) Eligibility Criteria for Borrowers There is no specific criteria for borrowers, all the borrowers in the form of individuals, partnership firms, private and public limited companies are eligible to borrow.